At a high level we see that the cost of carry of gold in all the four currencies has been low and stable over the last two years. Even though there are meaningful differences between the carry costs for each individual gold/currency pair with Gold/Pound having the highest cost of carry and Gold/Yen having the lowest, on their own the carry cost for each pair has largely stayed within a 0.20% range. The low and stable cost of carry has largely been a function of central bank monetary policy with their respective central banks, even in the US and UK which are experiencing stronger GDP growth, indicating that interest rates are likely to stay low for an extended period of time.
Since the start of the year the carry costs of Gold/Dollar, Gold/Yen and Gold/Pound have trended higher with the primary driver of higher carry costs being a rise in GOFO. In contrast Gold/Euro cost of carry has actually trended lower and moved back into negative territory meaning that a US investor would earn a yield to hold gold priced in euro. Of note the move lower in Gold/Euro cost of carry has been driven by a move lower in Eurozone interest rates as the Eurozone struggles with stuttering GDP growth and rapid disinflation and which has more than offset the rise in GOFO. The previous recent low in Gold/Euro cost of carry was in July 2013 when it touched -0.20% but with the fall being a function of lower GOFO rather than lower euro interest rates and where GOFO itself turning negative for short periods of time.
Finally we note that negative GOFO (indicating that investors earn a yield to hold gold priced in dollars) historically is a fairly infrequent occurrence but instances of negative GOFO have typically been symptomatic of “excess demand” for physical gold and often been accompanied by moves higher in the price of gold in dollar terms. Although counterintuitive, in a previous commentary, we discussed why the cost of carry of gold might turn negative and showed that it is typically caused when gold investors are willing to pay a premium (called the “convenience” yield) to hold physical gold rather than gold for future delivery and which in turn might be caused by market conditions that tighten the supply and demand balance for physical gold.
This article was written by Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE).